Estimating the Philippine underground economy a latent variable approach
Date
2004-01
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Abstract
This paper aims to estimate the size of the Philippine underground economy by means of a structural, latent variable model approach that provides a multiple indicators and multiple causes (MIMC) for the underground economic activity. The estimated latent variable model was used to generate a historical time-series index for the years 1980-2002.
From the 8 MIMC models simulated, three causal variables manifested significant structural parameter estimates: government consumption (as proxy for size of the public sector and degree of government regulation), self-employment and the strength and efficacy of the justice system. The other remaining causal variables however were able to manifest their expected signs in spite of not being able to attain the required significance level.
Parameter estimates from the general model consisting of 6 causal variables and 2 indicator variables (MIMC 6-1-2) and MIMC 3-1-2 were used to calculate the size of the Philippine underground economy for the years 1980-2002. It was observed that the size of the Philippine underground economy had been generally increasing over the time period. A comparison of the growth rates of GDP and the underground economy also showed that the two seem to move closely together and a general positive relationship may be observed.
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Keywords
Underground economy, Shadow economy, Informal economy, Econometrics, Economic growth